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@techreport{NBERw15003,
title = "Incomplete Information, Higher-Order Beliefs and Price Inertia",
author = "George-Marios Angeletos and Jennifer La'O",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "15003",
year = "2009",
month = "May",
doi = {10.3386/w15003},
URL = "http://www.nber.org/papers/w15003",
abstract = {This paper investigates who incomplete information impacts the response of prices to nominal shocks. Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise. In this model, the response of prices is pinned down by three parameters: the precision of available information about the nominal shock; the frequency of price adjustment; and the degree of strategic complementarity in pricing decisions. This result synthesizes the broader lessons of the pertinent literature. We next highlight that his synthesis provides only a partial view of the role or incomplete information. In general, the precision of information does not pin down the response of higher-order beliefs. Therefore, once cannot quantify the degree of price inertia without additional information about the dynamics of higher-order beliefs, or the agents' forecasts of inflation. We highlight the distinct role of higher-order beliefs with three extensions of our baseline model, all of which break the tight connection between the precision of information and higher-order beliefs featured in previous work.},
}